How Much You Can Borrow in Student Loans

You might have a high school student at home looking at Ivy League schools or big-name universities as their next educational step, and it's exciting to have lofty ambitions. However, reality can set in all too easily because big-name schools often come with big-ticket prices.

Some students might receive a great financial aid package that covers most of their educational costs due to their academic, athletic or artistic capabilities. Other students might have parents who can afford college, or who have saved money through a tax-advantaged 529 savings plan.

For most students though, attending college usually involves borrowing money through federal or private student loan programs. While loans offer the advantage of helping meet educational goals, taking on too much debt can have negative financial consequences in the long-term.

How Much Money You Can Borrow

There are two types of student loans available—federal and private. It is best to maximize the amount of money borrowed through federal student loans first before turning to private lenders. Current federal student loan lending limits are illustrated in the graph below, with a description to follow:

Undergraduate students can borrow up to $5,500 per year in Perkins Loans depending on financial need, the amount of other aid received, and the availability of funds at the selected college or career school. Funds for Perkins Loans are limited, so file the FAFSA as early as possible. Undergraduate students can also borrow between $5,500 and $12,500 per year in Direct Subsidized Loans or Direct Unsubsidized Loans depending on certain factors.

Graduate students can borrow up to $8,000 each year in Perkins Loans depending on financial need, the amount of other aid received, and the availability of funds at the selected college or career school. Graduate students can also receive up to $20,500 each year in Direct Unsubsidized Loans. Graduate students may be eligible to borrow the remainder of their college costs in Direct PLUS Loans, subject to satisfactory completion of a credit check.

Parents of dependent undergraduate students can also borrow money through PLUS Loans to cover the remainder of college costs that are not covered by other financial aid, again subject to satisfactory completion of a credit check.

Lifetime caps exist for the amount of money you can borrow through the federal student loan programs. If the total borrowed does not cover the costs of attending a particular college, students and parents can turn to the private student loan market for additional funds. Keep in mind, though, that private lenders have different, potentially higher interest rates and different payment terms that can affect long-term financial liquidity.

How Much Money You Should Borrow

This is often a very personal question to answer, and one that has to be carefully considered by each family. Try not to mix the emotion of wanting to attend a particular college with the reality of the ability to pay for it. Keep these factors in mind when deciding how much money to borrow through student loans:

How much will you borrow in total? Find out how long it takes most students to get an undergraduate degree from the college under consideration, and then determine if your student needs a graduate degree to enter a particular profession. This should give you a rough idea of how much you will need to borrow over the four to ten years, or more, that it can take to complete an education.

How much will you have to repay? The federal government provides a repayment estimator that will give you a good idea of the monthly payments that will be required after graduation.

Who will make the payments? Some parents are happy to take on student loans, while others want their students to assume the responsibility. Compare the estimated payments against the expected salary of whoever is repaying the loans.

Is it worth it? If the estimated payments will cause a financial strain, the family has to consider its options. The student may want to attend a lower-cost community college to complete their lower-division or general education requirements and then transfer to a university, or attend another college completely. The family can also pull together to earn additional money, or the student can intensify the search for scholarships to locate additional funding.

After completing and submitting the Free Application for Federal Student Aid (FAFSA), communicate with the colleges your student is interested in attending, and ask them to put together a financial aid package that covers the entire cost of tuition and related expenses.

The package will likely consist of federal loans, any scholarship money awarded to your student, grant money, if available (depending on your student's specific qualifications), a certain amount to be earned through on-campus employment for the student, and an estimate of funds that need to be covered by private loans.